Household debt & bank rip-offs

To its credit, the mainstream media has
covered this issue, although the focus has been largely on
the greed of the consumer, and less on causes such as widespread
poverty and irresponsible banks. The article was written by
Media Hell's Brian Dean, and originally published in the
Idler issue 36, Winter 2005.

Average household debt in the UK is approximately
£7,600, and rising [2005 figure]. That's excluding mortgages.
Contrary to press reports, it's not all about rampant consumer
greed

 20% of people use loans and credit
to survive until pay-day, according to Credit Action.
 24% of people go into debt to cover basic living costs,
according to a YouGov survey.
 One in five households are in debt to water companies,
according to the National Consumer Council (NCC).
 One in seven households can't afford their energy bills.
(NCC)
 One in twenty households have had their phone cut off.
(NCC)
 Those struggling with debt typically earn less than
£9,500 a year, according to a MORI survey.
 The current rise in debt hasn't been accompanied by
a consumption boom, according to the Bank of England Quarterly
Bulletin.
 Personal debt has grown twice as fast as income since
1997. On average, personal debt has increased by 50%, while
incomes have risen by 23%.

The rise in debt can be seen against a background of appallingly
low incomes. In real terms (ie allowing for inflation) the
bottom 10% of jobs pay less now than in 1970. The minimum
wage would have to be around £6.50 per hour to bring
low-pay up to the 1970 level. Meanwhile, people receiving
Jobseekers Allowance must survive on only £56.20 a week.

The widespread financial desperation indicated above shouldn't
obscure the fact that national wealth is increasing 
GDP has doubled since the early 1970s. You might ask where
all the wealth is going. Which leads us to the next section

Bank rip-offs

Banks and credit companies see household debt as an "opportunity".
Huge profits can be made from ripping-off the financially
desperate. Here are some typical rip-off scenarios:

 Late payment fees. If you pay your credit card
bill late, you'll automatically be charged a fee of around
£20. Credit card companies make £400 million a
year from such charges, according to the Consumer Association.
The Office of Fair Trading believes this breaches consumer
law (which stipulates that penalty charges must reflect only
the bank costs incurred). But it's difficult to prove, as
banks are secretive about how charges are calculated.

According to a front-page Times report on credit card
rip-offs (27/10/04), the banks' willingness to waive card
penalty fees as a "goodwill gesture" and their failure
to prosecute people who refuse to pay the charges are evidence
that the fees are unjustifiable. The Times quotes a
legal expert: "Credit card penalty charges are legally
unenforceable because they seek to punish the borrower rather
than compensate the bank for any losses that they have suffered".

 Other bank charges. Unauthorised overdraft
fees, returned cheque fees, unpaid standing order fees, various
"administration" fees, etc. Which? magazine
found that one in four people exceeded their overdraft limit
in the past year  it claims this is "a real moneyspinner
for the banks". The average "mortgage arrangement
fee" now stands at around £500  nearly double
what it was five years ago.

 Credit card cheques. Some credit card companies
mail these specifically to customers experiencing financial
difficulty. Can't pay your water bill? Why not use our cheques?
They look like normal cheques  seemingly harmless, except
for the high interest rate revealed in the small print. A
Consumer Association survey found that the higher a
customer's debt, the more likely they are to be sent credit
card cheques.

 False advertising. According to the Office
of Fair Trading, one in five credit card advertisements
breaks the law. The breaches mostly relate to misleading claims
about interest rates.

 Sub-prime lending. One in five people are denied
access to mainstream credit and have to borrow in the more
expensive "sub-prime" market, at rates that average
177%. This is "loan shark" territory, but it's a
lucrative enough market (worth an estimated £16 billion
a year) to attract big corporations.

 Payment protection insurance (PPI). This is
insurance which supposedly covers customers unable to keep
up credit card repayments, etc  it's generally taken
up by the most financially vulnerable people. Banks use PPI
as a 'cash cow', with huge profit margins which are not transparent
to customers. For example, the Guardian newspaper claimed
that 10% of Barclays' worldwide profits have come from selling
PPI.

The Guardian also alleged that Barclays sponsored
a secretive public relations operation called 'Protect' to
rebut claims of excessive profiteering on PPI. In an article
entitled 'Barclays exposed over huge insurance rip-off',
the newspaper quotes the reaction of Norman Lamb (MP and Treasury
select committee member) to its PPI findings: "It
is gross profiteering, absolutely excessive, and deserves
to be exposed. People need to be aware of this rip-off".

How to claim back your money

You can claim back all the penalty fees you've been charged
over the past six years (the legal maximum period for
reclaiming). You can also charge your bank interest on
this. They may object at first, or offer only a partial
refund, but eventually they will cave in, because:

 Under the "Unfair Terms in Consumer Contracts
Regulations (1999)" penalty charges have to reflect
administrative costs  profiting from them isn't allowed.
The banks make an estimated £4.5 billion in profit from
such charges each year.

 Penalty charges are often £30 or higher, but
the cost of processing overdrafts, bounced cheques, etc,
is estimated at between £2.50 and £4.50, depending
on the amount of manual intervention. In 80% of cases there
is no manual intervention.

Although your bank may initially threaten to defend itself
in court against your refund claim, no bank has done so to
date. This is because they know they have little chance of
winning, and they are petrified of bad publicity. In practice,
people determined to be refunded have been fully refunded
(in some cases by thousands of pounds).

Debt misery

 It takes an average earner 40 days just to pay off
the £2,400 interest on the average level of credit card
and loan debt. February 10th (the 41st day of 2005) has thus
been dubbed 'Debt Freedom Day'.
 15% of people say their debts are spiralling out of
control or keeping them awake at night, according to a YouGov
survey.
 Citizens Advice Bureau advisors have dealt with
a 47% increase in personal debt problems over the last five
years.
 A quarter of those in debt are receiving treatment
for stress, depression and anxiety from their GP, according
to the Citizens Advice Bureau.
 1.4 million customers on electricity or gas pre-payment
meters have disconnected themselves for fear of running up
debt.
 Bankruptcies increased by 30% last year, and by nearly
30% the previous year, according to the DTI.
 The biggest cause of rows within a relationship is
not infidelity but money, according to Relate.
 The amount of debt being chased by Britain's bailiffs
has soared by 70% over the past two years.
 Sainsbury's Bank predicts that 30% of personal
loans taken out this year will be for "debt consolidation"
(ie paying off other outstanding debts).